Oral argument: Apr. 18, 2011
Appealed from: United States Court of Appeals for the Federal Circuit (Mar. 10, 2010)
Intellectual Property, Patent INFRINGEMENT, Presumption of Validity, Burden of Proof
The software entity i4i Limited Partnership and Infrastructures for Information, Inc. (“i4i”) sued Microsoft, alleging that Microsoft Word's XML processing and editing capabilities infringed on i4i’s patent. Microsoft counterclaimed, contending that i4i's patent was invalid under 35 U.S.C. § 102(b)'s on-sale bar. At trial, the jury was instructed that Microsoft must prove the patent's invalidity by clear and convincing evidence, even though the evidence Microsoft presented had never been reviewed by the United States Patent and Trademark Office ("PTO"). Microsoft argues that this high standard, which longstanding Federal Circuit precedents support, is contrary to congressional intent, at least where the PTO never reviewed the "prior art" on which the alleged invalid patent was based. On the other hand, i4i contends that the Federal Circuit's caselaw, combined with Congress's enduring failure to legislatively overrule it, reveals that Congress intended a higher standard to apply to the presumption of validity. Amici in support of the clear-and-convincing-evidence standard argue that strong patent protection is essential to encourage innovation. Others, however, encourage the Supreme Court to overturn the Federal Circuit's precedent and require only a preponderance of the evidence. The Supreme Court's decision in this case is likely to affect the certainty of all patents, and consequently is likely to affect the calculus faced by all patent-law litigants when deciding whether to settle or litigate a suit.
The Patent Act provides that “[a] patent shall be presumed valid” and that “[t]he burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity.” 35 U.S.C. § 282. The Federal Circuit held below that Microsoft was required to prove its defense of invalidity under 35 U.S.C. § 102(b) by “clear and convincing evidence,” even though the prior art on which the invalidity defense rests was not considered by the Patent and Trademark Office prior to the issuance of the asserted patent. The question presented is: Whether the court of appeals erred in holding that Microsoft’s invalidity defense must be proved by clear and convincing evidence.
Whether, in patent infringement cases, 35 U.S.C. § 282 requires challengers of the validity of a patent to prove invalidity by a clear-and-convincing-evidence standard or whether courts should only hold challengers to a preponderance-of-the-evidence standard.
Respondent i4i is a software consulting company that creates, markets, and sells computer software. See i4i Ltd. P’ship v. Microsoft Corp., 598 F.3d 831, 839 (Fed. Cir. 2010). On June 2, 1994, it applied for a patent covering its invention—an improved method for manipulating an electronic document's architecture and content. See id. This technology is commonly referred to as a "markup language." See id. These computer languages place "tags" around text to tell a computer how to structure an electronic document, including how to display and format text, and whether to classify data as a certain type, such as a name, social security number, or address. See id. at 839–40. One specific markup language, XML, allows users to develop their own custom tags. See id. All of the information about the document's structure, including the tags, is known as the "metacode." See id. at 840.
While markup languages have existed for some time, i4i developed the innovative step of storing the metacodes separately from the document. See i4i Ltd. P’ship, 598 F.3d at 840. This improved preexisting technology by allowing users to focus their attention solely on either the document's content or structure. See id. The United States Patent and Trademark Office ("PTO") issued a patent for this method on July 28, 1998, as U.S. Patent No. 5,787,449 (“'449 patent”). See id. at 839.
Beginning in 2003, the Petitioner Microsoft Corporation began releasing versions of Microsoft Word that were capable of editing XML. See i4i Ltd. P’ship, 598 F.3d at 840. In 2007, i4i sued Microsoft, alleging that Microsoft Word's XML processing and editing capabilities infringed the '449 patent. See id. In response, Microsoft counterclaimed, alleging that i4i had sold a software program, SEMI S4, more than one year before applying for a patent. See id. Therefore, it argued that the invention was unpatentable due to the on-sale bar of 35 U.S.C. § 102(b), which requires that a patent application be filed within one year of a sale of the invention. See id. Consequently, Microsoft contended that the PTO issued the '449 patent in error, rendering it invalid and unenforceable. See id. at 839. The PTO never examined SEMI S4 during patent review. See Brief for Respondents, i4i Limited Partnership and Infrastructures for Information, Inc. at 5–6.
According to i4i, the company developed SEMI S4 years ago as a custom, one-time project. See Brief for Respondents at 5. Due to its age, both the customer and i4i discarded SEMI S4's source code long before litigation commenced. See id. This limited the software's evidentiary value. See Brief for Petitioner, Microsoft Corp. at 3. Consequently, because the PTO had never had a chance to review the SEMI S4 software before issuing the '449 patent, Microsoft sought a jury instruction that its burden of proof for invalidity be only a preponderance of the evidence—not the typical clear-and-convincing standard. See id. at 6–7.
The United States District Court for the Eastern District of Texas denied Microsoft's request, and the jury found that the '449 patent was valid and that Microsoft had willfully infringed upon it. See i4i Ltd. P'ship, 598 F.3d at 840. Consequently, the jury awarded $200 million in damages. See id. Furthermore, the district court granted a permanent injunction against Microsoft and enhanced the damages by $40 million. See id. at 840–41.
Microsoft appealed to the United States Court of Appeals for the Federal Circuit, arguing that the jury instruction requiring Microsoft to prove invalidity by clear and convincing evidence was inappropriate when the PTO had never examined the evidence presented. See i4i Ltd. P'ship, 598 F.3d at 848. The Federal Circuit disagreed, finding that the jury instructions were consistent with circuit precedent and affirming the district court's judgment. See id. On November 29, 2010, the Supreme Court granted certiorari. See Microsoft Corp. v. i4i Ltd. P’ship, 131 S. Ct. 647 (2010).
Petitioner Microsoft alleges that the district court erred by instructing the jury that Microsoft had to prove invalidity of a patent by clear and convincing evidence, rather than simply by a preponderance of the evidence. See Brief for Petitioner, Microsoft Corp. at 13. Microsoft argues that the standard should only be a preponderance of the evidence, especially where one introduces prior-art evidence that the United States Patent and Trademark Office (“PTO”) never addressed before issuing the patent. See id. On the other hand, Respondent i4i contends that under the Federal Circuit's longstanding interpretation of 35 U.S.C. § 282, one must show a patent's invalidity by clear and convincing evidence.
The Supreme Court's decision in this case could recast the traditional evidentiary burden for challengers of patent validity, which could have ramifications in nearly every patent case because parties weigh their chances of success before deciding whether to settle or proceed with litigation. See Brief of Amicus Curiae The Wireless Association in Support of Petitioner at 17–20.
Quality at the Patent and Trademark Office
The Public Patent Foundation faults the current clear-and-convincing-evidence standard for providing too much deference to issued patents in light of the arguably poor quality of U.S. patents. See Brief of Amicus Curiae Public Patent Foundation in Support of Petitioner at 3. It points to an array of statistics to support its claim. See id. at 4–7. For example, the Foundation states that in 2009, courts invalidated nearly half of all patents reviewed for validity. See id. at 4. It also stresses a recent study of U.S. patent applications where the inventor also sought a patent in the European Patent Office; the study found that where a U.S. patent was issued, the European Patent Office only issued a patent 72.5% of the time. See id. at 7. In the Public Patent Foundation’s view, the PTO issues numerous invalid patents that should not require clear and convincing evidence to invalidate. See id. at 9, 11.
The Bar Association of the District of Columbia (“Bar Association”) does not dispute the poor quality of U.S. patents; however, it argues that lowering the evidentiary standard would only make things worse, not fix the problem. See Brief of Amicus Curiae Bar Association of the District of Columbia in Support of Neither Party at 9–10. It first recognizes the counterpoint that a lower standard might incentivize applicants to submit more prior art references when applying for a patent. See id. Nevertheless, the Bar Association contends that should this indeed happen, the increased volume of these references would likely flood the PTO's examiners with many unnecessary references. See id. at 12–13. Accordingly, it posits that the increase in the volume of references, combined with the fact that examiners already work under a severe time crunch to review applications, will result in even more cursory reviews of patent applications—thereby worsening patent quality. See id.
Does the Current Standard Impede Innovation?
Other amici take a similar position, arguing that the incomplete review by patent examiners coupled with the clear-and-convincing standard chills innovation, especially among individuals and small entities. The Business Software Alliance, for example, contends that invalid patents—with their corresponding threat of litigation—can chill legitimate competition. See Brief of Amicus Curiae Business Software Alliance in Support of Petitioner at 9–10. The Alliance asserts that this threat deters new competitors from entering the marketplace, forces those that do enter to sign unnecessary licenses, and creates general uncertainty within the marketplace and raises costs—all of which limits innovation. See id.
The Electronic Frontier Foundation argues that the clear-and-convincing standard harms both small software innovators and the development of open source software. See Brief of Amici Curiae Electronic Frontier Foundation, et al. in Support of Petitioner at 6. In these particular areas, software's short useful life coupled with haphazard documentation make the clear-and-convincing-evidence standard especially burdensome and easily manipulatable by large, centralized organizations with vast legal teams. See id. at 8–10. As Apple and Intel contend, this restriction on innovation results in a strong public interest to eliminate invalid patents, and the clear-and-convincing standard impedes this. See Brief of Amici Curiae Apple, Inc. and Intel Corp. Supporting Reversal at 14.
A number of venture capital firms, however, disagree. They assert that the clear-and-convincing-evidence standard actually protects innovation. See Brief of Amici Curiae Venture Capital Firm Aberdare Ventures, et al. in Support of Respondents at 20. They also argue that lowering the evidentiary standard will increase uncertainty surrounding the validity of all patents. See id. Because an innovative, startup company's success often depends on patent protection, this increased uncertainty raises the level of risk, deterring some venture capitalists from investing when they otherwise would. See id. at 8–9, 20. They believe that this deterrence will have significant effects on innovation and consequently the United States' economic growth. See id. at 21.
Will a New Standard Even Make a Difference?
Paul F. Morgan, in a guest post on the patent blog Patently-O, argues that even if the Court does change the standard, it will have little practical effect on how entities engage in business and deal with litigation because it will affect the outcome in very few cases. Paul F. Morgan, Microsoft v. i4i – Is the Sky Really Falling?, Patently-O Blog, Jan. 9, 2011. While noting that "technically" an easier burden of proof for invalidation might lead to more defense verdicts and consequently fewer settlements, he alleges that the effect would be insignificant in "reality." See id. The foundation of his argument is that only 3% of patent suits go to trial, and that only a few of these cases will be decided on validity grounds. See id. Furthermore, the jury—not the judge—usually determines validity. See id. Accordingly, he posits that merely changing a vague burden of proof in the jury's instructions will have little practical effect, especially when the item attacked is a patent granted by the United States government—a patent that an attorney can show to the jury, complete with its gold seal and blue ribbon. See id.
After the United States District Court for the Eastern District of Texas refused to set aside the jury’s verdict or grant a new trial, Microsoft appealed to the United States Court of Appeals for the Federal Circuit. See i4i Ltd. P’ship v. Microsoft Corp., 598 F.3d 831 (Fed. Cir. 2010). Microsoft challenged the jury’s verdict that it was liable for willful patent infringement, and disputed the district court’s grant of a permanent injunction barring Microsoft from importing, selling, offering to sell, or using copies of Microsoft Word with the infringing patent. See id. at 841. Among other things, Microsoft argued that i4i’s patent at issue—the ’449 Patent—was invalid. See id. The Federal Circuit, however, affirmed the jury’s findings of the patent’s validity and infringement. See id. at 864. The court also rejected Microsoft’s contention that the district court’s imposition of a clear-and-convincing-evidence standard was incorrect, instead concluding that the jury instructions were correct based on its own precedent and the Supreme Court’s recent decision in KSR Int’l Co. v. Teleflex, Inc., 127 S. Ct. 1727 (2007), which did not alter the burden of proving invalidity by clear and convincing evidence. See id. at 848.
Microsoft asserts that the Federal Circuit’s ruling—that lower courts must hold all patent validity challenges to the clear-and-convincing standard—conflicts with both the Supreme Court’s default presumption that civil cases adopt a preponderance standard and with longstanding principles of administrative law. See Brief for Petitioner, Microsoft Corp. at 13.
The Supreme Court of the United States will address whether 35 U.S.C. § 282 imposes a burden upon challengers to prove by clear and convincing evidence that a patent is invalid, and whether such a heightened standard of proof is a judicially created rule that implicates principles of agency deference.
What Standard of Proof Does Section 282 Require?
Both parties agree that the applicable federal statute on patents, 35 U.S.C. § 282, imposes a standard of proof for civil cases that is at least as stringent as a preponderance of the evidence standard. See Brief for Petitioner at 8; Brief for Respondents, i4i Limited Partnership and Infrastructures for Information, Inc. at 7. They disagree, however, over whether the standard should be based on “preponderance” or “clear and convincing” evidence. While a challenger disputing the validity of a patent claim must prove its invalidity, the statute is silent on the particular standard that the challenger must satisfy.
The relevant parts of Section 282 state that patents “shall be presumed valid” and that the “burden of establishing invalidity . . . shall rest on the party asserting such invalidity.” See 35 U.S.C. § 282 (2006). According to Microsoft, the statutory language only assigns to the challenger the burden of proving invalidity; thus, there is no basis for a court to presume that the standard of proof should be higher than the default preponderance-of-the-evidence standard. See Brief for Petitioner at 14. Microsoft argues that under the Supreme Court’s 1991 decision in Grogan v. Garner, 498 U.S. 279 (1991), this default standard is only superseded when there are important individual interests or rights at stake. See id. at 14–15. Courts usually only recognize such interests, Microsoft argues, as being highly important if they are threatened by coercive government action. See id. at 15. Because this case does not involve drastic action against individuals, Microsoft asserts that the only appropriate standard is preponderance of the evidence. See id.
On the other hand, i4i states that the Supreme Court has adopted a clear-and-convincing standard for civil cases that do not invoke liberty interests, oftentimes in situations that involve the promotion of stable property rights or respect for judicial precedent. See Brief for Respondents at 31. Thus, i4i argues that Microsoft misleadingly depicted an irrefutable presumption that a lower standard typically applies in all civil cases, when in fact, individual interests do not have to be at issue in order for a court to adopt a more stringent standard. See id. at 31–33.
i4i also argues that Section 282 codified the common-law presumption—established by the Supreme Court before the enactment of the statute in 1952—that patent validity challengers had to satisfy a heightened standard of proof. See Brief for Respondents at 12. Specifically, i4i notes that many of the Supreme Court’s decisions that applied a heightened standard for invalidity claims involved a prior-use claim that the Patent Office never considered, which matches the situation in this case. See id. at 13.
Microsoft responds to i4i’s arguments by rejecting its interpretation of the legislative history behind Section 282. See Brief for Petitioner at 18. The legislative history, Microsoft contends, does not reflect Congress’s intent to codify any particular standard of proof, let alone a clear-and-convincing-evidence standard. See id. at 18–19. If Congress had so intended, it would have likely indicated such intent in earlier drafts of the statute, according to Microsoft. See id. at 19. Furthermore, Microsoft notes that the Federal Circuit, in its pre-1952 caselaw, refused to recognize a uniform application of the standard for invalidity claims. See id.
Finally, i4i asserts that Congress has implicitly endorsed the Federal Circuit’s clear-and-convincing-evidence standard by failing to make such changes when it was amending other parts of Section 282. See Brief for Respondents at 48–49. Specifically, i4i notes that the Federal Circuit’s interpretation of the standard has stood for 28 years without any reaction from Congress, while the legislature took action to alter the first paragraph of Section 282 in 1965 and amended the statute in 1995. See id. at 51–52. Moreover, according to i4i, the Supreme Court should presume that Congress was aware of Federal Circuit precedent regarding this standard since official records do not suggest otherwise. See id. at 50.
Microsoft attempts to refute i4i’s contention by noting that the Supreme Court has stated in the past that Congress may choose not to make an affirmative move to correct every lower court’s interpretation of its statutes, even if it believes the interpretation is erroneous. See Brief for Petitioner at 37. Therefore, in Microsoft’s view, courts should not automatically construe congressional inaction as tacit approval, nor should they assume that Congress was even aware that the Federal Circuit read a heightened standard into the statute at issue here. See id. Accordingly, Microsoft believes that the Supreme Court should not adopt the Federal Circuit’s holding simply because Congress did not overturn it. See id. at 40.
Does the Standard of Proof Implement Principles of Agency Deference?
Microsoft also argues that courts would not be able to justify the imposition of a clear-and-convincing standard based on principles of administrative law. See Brief for Petitioner at 37. The Federal Circuit has held that courts should defer to the United States Patent and Trademark Office’s (“PTO”) decisions regarding patentability. See id. at 41. Microsoft contends that in suits involving issues of patent validity, federal courts have recognized that the only provision governing judicial deference is 35 U.S.C. § 282—in other words, the Administrative Procedure Act’s (“APA”) deferential standard of review does not apply to patent infringement cases. See id. at 42.
Specifically, Microsoft asserts that the Supreme Court has held in prior cases that the APA was designed to allow a review of an agency’s decision based exclusively on the record the agency presents to the reviewing court. See Brief for Petitioner at 42. But in this case, a patent validity challenge by the alleged infringer is a defense to a claim of patent infringement, not a method of seeking review of agency action, since the agency (the PTO) is not a party to the case. See id. at 42–43. Therefore, according to Microsoft, the APA standard of review is not appropriate for patent infringement cases. See id. at 42.
In the alternative, Microsoft believes that even if the APA’s standards of review applied, the Supreme Court should resolve such validity issues without deference to the lower courts’ opinions. See Brief for Petitioner at 44. According to Microsoft, patent infringement suits cannot be litigated based only on the record before the PTO because Section 282 encourages the introduction of new evidence concerning the patent’s invalidity during the district court’s fact-finding process. See id. at 44–45. The inclusion of new evidence, Microsoft contends, necessarily warrants a non-deferential—de novo—review of the lower court’s findings. See id. at 45.
i4i, however, disagrees with Microsoft’s interpretation of administrative-law principles. According to i4i, courts routinely defer to governmental agency decisions that are outside the scope of APA actions, and such deference reflects a respect for Congress’s determination that agencies should fill any gaps in their regulations. See Brief for Respondents at 56. Therefore, judicial deference in this situation is grounded not in the APA, but in the presumption that agencies such as the PTO can determine validity questions in their area of expertise. See id.
Furthermore, i4i contends that the Supreme Court’s decision in Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402 (1971) established that de novo review is only appropriate when the court has determined the agency’s fact-finding procedures to be inadequate, which the Supreme Court has never found. See Brief for Respondents at 57. Overall, i4i believes that judicial deference to the PTO’s decision is highly appropriate and consistent with principles of administrative law established by the Supreme Court.
In this case, the Supreme Court will determine whether 35 U.S.C. § 282 requires the challenger of a patent's validity in patent infringement cases to satisfy the clear-and-convincing-evidence standard, and whether such a heightened standard of proof is justified under principles of administrative law that call for judicial deference to agency decisions. If the Court reverses the Federal Circuit, then Microsoft would only have to prove that i4i's patent was invalid based on a preponderance of the evidence. However, if the Court agrees with i4i, and imposes the clear-and-convincing standard on Microsoft, then the jury's finding that Microsoft was unable to satisfy this stringent standard would stand.
Edited by: Catherine Suh
· IP Watchdog, Gene Quinn: U.S. Supreme Court Accepts Microsoft Appeal in i4i Case (Nov. 29, 2010)
· Patently-O, Dennis Crouch: Microsoft v. i4i: Shifting Weight of Evidence versus Shifting Burden of Proof (Mar. 13, 2011)
· The National Law Review, Angelo J. Bufalino and Heidi E. Lunasin: How Microsoft v. i4i Could Change the Future of U.S. Patent Law (Mar. 4, 2011)